Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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Schumer urges regulators to investigate Countrywide

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Thursday, May 15, 2008

Is the Noose Tightening Around Countrywide?

Listen to this article One of the reasons for Bank of America to walk from the Countrywide deal is the rising tide of legal costs and potential for sizeable damages. Admittedly, at this juncture the prevailing view is that the Charlotte bank would renegotiate the acquisition rather than abandon it (particularly since it should be able to limit liability to the merger sub), but it still begs the question of why buy an operation that has the possibility of having zero financial value with considerable headache and embarrassment attached?

Some outstanding actions are moving forward. For instance, the US Bankruptcy trustee in three states have joined to accuse Countrywide of abusing the bankruptcy process. That's pretty unusual. There are also quite a few actions pending against the proposed merger; some have been halted as similar ones are litigated.

Established Countrywide hater Gretchen Morgenson provides an update on a class action suit alleging insider trading (!) and a failure to adequately supervise operations, as exhibited in lousy lending practices that (per the suit) simply cannot have gone unnoticed by management. While Morgenson has the mortgage lender in her crosshairs, she generally does an evenhanded job of reporting when working primarily from court filings, as in this case.

The significance of this suit, which can now proceed to the discovery phase, may be greater than it appears. Morgenson cites one level: this will be the few actions against the executives of a failed mortgage lender.

Another, less obvious impact: the suit will probe the bank's lending and management practices, and that will pave the way for further litigation. And it has the potential to confirm what are now only suspicions about abusive and misleading practices and thus further lower the value of the franchise.

Remember, once a suit is filed, testimony and exhibits filed in court become part of the public record unless sealed (unlikely in this instance). They can be used by subsequent plaintiffs at no cost, thus lowering the barriers for subsequent litigation.

Let me give you a mundane example. A recent Countrywide employee wrote me to describe many of the bank's bad practices. One was that the bank had launched a national campaign for a no-fee mortgage. He said he was certain not a single mortgage of the type promoted had ever been issued because the customer service people had all been given scripts to steer callers into other products (the no-fee loan had sufficiently high interest costs to make loans with fees look more attractive).

I called a litigator I know. She said the fact set would constitute advertising fraud and would indeed make for a good suit. However, most firms would wait for initial suits over more basic forms of fraud to proceed, since it would be easier to build the case for advertising fraud based on their causes of action and evidence.

That's a long winded way of saying that if Countrywide is indeed the serial miscreant many believe it to be, the lawsuits will build on themselves.

From the New York Times:

Directors and officers of Countrywide Financial, the beleaguered mortgage lender, must answer shareholder accusations of insider trading and an overall failure to monitor lending practices that led to the company’s collapse, a federal judge in California has ruled.

Rejecting the arguments of Countrywide executives and directors that they were unaware of lax loan operations that led to ballooning defaults, Judge Mariana R. Pfaelzer of Federal District Court in Los Angeles ruled Tuesday that she found confidential witness accounts in the shareholder complaint to be credible and that they suggested “a widespread company culture that encouraged employees to push mortgages through without regard to underwriting standards.”

Plaintiffs also identified “numerous red flags” that would have warned directors of increasingly risky loans made by Countrywide, according to the judge, who rejected a motion to dismiss the suit. “It defies reason, given the entirety of the allegations,” Judge Pfaelzer wrote, “that these committee members could be blind to widespread deviations from the underwriting policies and standards being committed by employees at all levels. At the same time, it does not appear that the committees took corrective action.”....

The plaintiffs in the case said they hoped to recover money for shareholders from Countrywide officials named in the case who sold $850 million in stock from 2004 to 2007. The plaintiffs contend that the directors and officers dumped shares even as the company spent $2.4 billion to repurchase its own stock in late 2006 and early 2007.

The chief executive of Countrywide, Angelo R. Mozilo, has argued that his $474 million in stock sales during the three-year period complied with securities laws under a planned selling program. But he revised the program, known as a 10b5-1 plan, several times, each time increasing the shares to be sold.

As a result, the judge wrote: “Mozilo’s actions appear to defeat the very purpose of 10b5-1 plans,” created to allow corporate insiders to sell stock regularly and without direct involvement.

Gerald H. Silk, who also represents the plaintiffs, said: “Corporate fiduciaries cannot expect to evade liability by blaming a general market downturn when there is specific and systematic misconduct taking place right beneath their noses.”

The suit names 14 current and former directors and officials as defendants; it is known as a derivative action because shareholders of Countrywide are suing its officers and directors on behalf of the company.

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